Is Costco’s Business Model Better Than Walmart’s?

I came across this article highlighting Costco CEO Jim Sinegal and the business model that has helped make his company, Costco, the nation’s fifth largest retailer. Sinegal has taken measures to make sure that prices are kept at rates just as low, if not lower than, Walmart’s while still managing to pay his employees a living wage (the average Costco employee makes $17 an hour, versus just $9 an hour at Walmart). Even part time employees are eligible for health insurance and dental after six months with the company. Sinegal himself makes just $350,000 per year, versus a salary of $35 million for Walmart’s CEO. What that means is that Walmart’s CEO makes more in an hour that the vast majority of Walmart’s employees will earn in a year.

Despite the generosity of Costco’s pay and benefits, Sinegal claims that these measures are not altruistic. They are, as he puts it, “good business sense.” Happy and healthy employees are generally more productive. Costco does not have the problem of internal theft that plagues many Walmart stores, and turnover rates are far lower. All of these things save the company money, which they can then spend on expansion and keeping prices low. Sinegal also claims that his relatively low salary (from a CEO perspective) helps increase morale, that it isnt’ healthy to have a person leading a company who makes more than five times what the average employee on the floor makes.

Coming off of Black Friday, if you were watching the news you probably heard about Walmart employees going on strike, and the general dissatisfaction that many Walmart employees face. Such stories were not reported of Costco, which is growing to become one of Walmart’s chief competitor’s in the market.

In spite of Costco’s generous pay and benefits package, the company’s stock is still doing quite well, gaining 10 points in the past year, while Walmart stock slipped by five points. Despite this, however, some retail industry insiders are warning Sinegal that he should reduce employee benefits and pay. They say that stock prices would be better served if Sinegal were to take these steps, however, looking at companies such as Walmart that have been notorious for low wages and skimpy benefits only to continue to see dips in stock prices, it seems that Sinegal is outsmarting industry insiders every step of the way.

What do you think? Is Sinegal’s business model, which puts customers, employees, and expansion before personal profits and gain a good strategy? Is it something you would like to see more of in this country?

I love and admire everything that Costco is doing for its employees and customers. However, my concern is that this style of management may not survive him. After he retires will the next CEO do the same. All I hope now is that other companies follow suit.